A woman walks past a slogan in central Athens on January 21, 2015. Whoever wins Greece's general election on January 25, Europe will have to take urgent action to tackle the country's mountain of debt before it buries the rest of the eurozone, analysts say. Alexis Tsipras, head of the far-left Syriza party that leads in the polls, has alarmed EU capitals by pledging to ditch austerity measures and renegotiate the debt left by two huge international bailouts. AFP PHOTO/ LOUISA GOULIAMAKILOUISA GOULIAMAKI/AFP/Getty Images
(Louisa Gouliamaki/AFP/Getty Images)

A specter is haunting Europe — the specter of Greece's debt.

For a long time, the fact that Greece is basically bankrupt was the truth that dared not speak its name. But now it's become the truth that can speak its name as long as long as it doesn't do anything else. Even German finance minister Wolfgang Schäuble has admitted that Greek "debt sustainability is not feasible without a haircut," before less-than-helpfully concluding that "there cannot be a haircut" because it's against the rules. And that seemed to be that — until Tuesday night.

That's when the International Monetary Fund became maybe the most unlikely revolutionary ever with its demand that Greece get debt relief in any bailout it's a part of. The vague promises Europe has and continues to make aren't enough. The IMF won't play this game of I-give-you-money-to-give-back-to-me-so-we-can-both-pretend-you-can-pay-me-back anymore. It's already seen how that one ends—with Greece defaulting on it, as it did last week. So the IMF doesn't want to reduce Greece's debt because it feels bad for Greece. It wants to reduce Greece's debt because it wants to be repaid by Greece.

The simple story is that Greece's debt might have been manageable before, but it's not anymore. In the past six months, Greece's government has borrowed more than it was supposed to, and Greece's economy hasn't grown like it was supposed to—it's actually shrunk, and probably a lot more now that its banks have been forced shut—so that Athens not only has more to pay, but is also less able to pay. That's why the IMF now estimates that Greece's debt-to-gross domestic product ratio will spike from 177 percent today to 200 percent in the next two years. And that's with some pretty aggressive assumptions, too. The IMF expects Greece to run budget surpluses, excluding interest interest payments, of 3.5 percent of GDP "for the next several decades," even though it acknowledges that "few countries have managed to do so" in the past. And it thinks Greece will "go from the lowest to among the highest in productivity growth and labor force participation rates in the euro area." In other words, Greece's debt is unsustainable even if you assume it runs surpluses for an almost impossibly long time and its economy grows a lot.

So if Greece can't cut its way out of debt and it can't grow its way out of debt, its only option is to default its way out of debt. There are more and less painful ways of doing this. Least among them is for the two sides to work together, so both can keep getting at least some money from the other. That's a polite default, or a restructuring. And the IMF has suggested three ways that might work. Europe can either give Greece money every year; give Greece a pass on some of what it owes; or give Greece far more time to pay what it owes, with a 30-year grace period at the start. But in any case, Europe is effectively going to have to give—notice how that word keeps popping up—Greece money. It just depends on how they want to do it.

If history is any guide, the answer is in the least transparent way possible. That rules out cutting Greece a check every year or cutting the amount it owes. Instead, today's 20-year bonds that it doesn't need to pay for 10 years could become tomorrow's 60-year bonds that it doesn't need to pay for 30 years. And the interest rate on them might even get reduced from 0.5 to 0.2 percent. Bonds like that would be so negligible that there's a good chance far in the future, if there really is a United States of Europe, that they'd become entirely negligible—that is, forgiven. That, after all, is the process that Europe started in 2012, when it turned a lot of Greece's debt into the make-believe variety by postponing payments, lowering interest payments, and stretching out pay times. The IMF just wants Europe to make it even more make-believe now. And Europe probably will, because the alternatives are so much worse: either having to pay more for a bailout that doesn't include the IMF, or having the bailout fall apart and Greece leave euro.

But it won't be long until Greece is back here again. It's worth pointing out, though, that this isn't because 177 percent of GDP of debt is by itself unsustainable. It's not, or at least it doesn't have to be. Countries with good financial reputations that borrow in a currency they control—like postwar Britain—can and have carried even higher debt loads. No, it's that 177 percent of GDP of debt is unsustainable in the euro zone. Those countries can't offset budget cuts with lower interest rates to spur lending or a cheaper currency to make workers and exports more competitive, so budget cuts that suck money out of the economy can do more harm than any savings that goes toward debt repayment. That is, after all, a pretty good description of what happened in Greece between 2009 and 2014. Its total debt only went up 6 percent during that time—partly due to its write-down in 2012—but its debt burden (or debt-to-GDP ratio) went up 40 percent. Austerity, in other words, has been self-defeating, and that's probably not going to change. So even if Greece does everything right, there's a good chance its debt-to-GDP ratio will keep rising even if its debt doesn't, at which point Europe will tsk-tsk it for needing another restructuring.

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The euro is a triumph of politics over economics, but each one is short-lived. What that means is that having a single central bank set a single interest rate for 18 different countries will inevitably end in tears for some of them. Europe has been able to make up for that, though, by summoning the will to do whatever the least it needs to do at any particular moment for the common currency to stick together. But the problem is that each bailout makes the politics of the next one harder at the same time that the economics don't get much easier. It's enough to keep the euro from breaking apart, but not enough to fix it.

And that's the best way to think about the IMF's plans for Greece's debt. Two of them (a haircut or restructuring) would solve the crisis for now, and the other (annual transfers) would solve it for good. But Europe will probably only be able to bring itself to do the one that will help the least, because voters don't want it to do any more than that. And it's hard to see how that would change. Well, unless bailout fatigue sets in, and people want even less than the least.

Then the workers of Europe, let alone the world, wouldn't unite, and they really might lose their euro chains.